Flash Boys: A Wall Street Revolt, by Michael Lewis

For 300 million dollars, your web browser could receive this post three milliseconds faster

I’ve just finished reading Flash Boys: A Wall Street Revolt by Michael Lewis, an exposé on the rampant parasitism at the core of the U.S. stock markets that’s driving the race for faster data connections in which thousandths and even millionths of a second confer bankable advantages.

The key theme is that those at the center of all this plumbing face tremendous conflicts of interest and have plenty of opportunities to optimize for themselves at the expense of ordinary investors. Throughout it all they can publicly claim to be merely providing “liquidity” or “stability”. Every transaction has a buyer and a seller, but the long line of parasites that stand between them live in the shadows and with lightning-fast computers and data links can repeatedly extract hidden tolls on order flow.

Because of these opportunities, order flow by itself is so valuable there’s a large market in the buying and selling of the right to steer an order to a particular exchange or dark pool for matching. It’s true that spreads have shrunk over the past twenty years, but sharks lurk in these dark pools.

For many readers, this will be the first time they’ve had to consider time intervals so small. Lewis helpfully quantifies them by counting how many would fit within a blink of an eye. Milliseconds (thousandths of a second) and microseconds (millionths of a second) abound, and there’s even a scene where a discussion of how to route a fiber optic cable across a country road – straight across or diagonally – brings up nanoseconds (billionths of a second).

It will also be for many the first practical evidence the speed of light is something less than infinite. At 186,282 miles per second, the maximum speed photons – and thus trading information – can travel is 186 miles per millisecond in a vacuum, reduced to about 125 miles in fiber optic cable. It turns out this is a significantly limiting factor for all sorts of geographic and routing decisions for Wall Street’s biggest players. It’s an argument for tunneling through the Allegheny mountains rather than routing through a pass, say, or even trenching through a specific parking lot instead of making a small detour.

It’s important to note that high frequency trading, to the degree that it means faster communications, is not in itself a problem; faster speeds are only a tool used by insiders to put their own interests ahead of their customers. It’s a little disturbing that the best way to make money in these markets might not be from participating in them, but in parasitizing them. If these markets are a river of capital and information, investors are being sold down this river.

I would have liked to see more about specific technologies used to speed up communications, and more about the various traps laid by these HFTs (High Frequency Traders). It would have also been interesting to hear more about the potential microwave competitor hinted at near the end of the story. I have yet to read Andrew Blum’s Tubes or Sal Amuk’s and Joseph Saluzzi’s Broken Markets; both might be good companion volumes.

The book feels like it was rushed to the editors, and could have benefited from another three months of reporting. Maybe when you talk about milliseconds long enough writing a book seems like an eternity. And it’s a little short on content; some chapters seem bolted on as filler. This story might have worked better as a long magazine piece.

Regardless, (or irregardless, as they might say in these New Jersey data centers), Lewis is a captivating writer and Flash Boys is a good adventure story.